We maintain our Neutral recommendation on
Southwestern Energy Company
) − an independent energy company engaged in the exploration,
development and production of natural gas and crude oil in the
CHESAPEAKE ENGY (CHK): Free Stock Analysis
SOUTHWESTRN ENE (SWN): Free Stock Analysis
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Southwestern Energy's vast acreage in the Marcellus Shale as well
as in the Fayetteville Shale plays, encouraging drilling results as
well as its focus on return on investment were partly offset by the
depressed natural gas price environment.
The company is one of the largest producers of natural gas in the
U.S. with core Fayetteville Shale properties spreading over 889,000
net acres. About 131 operated Fayetteville wells were put on
production during the second quarter, driving record net production
of 121.0 billion cubic feet per day (Bcf/d), up 13% from the
year-ago level and 4.5% sequentially. Notably, the sequential rise
occurred despite production being negatively impacted by 0.5-1.0
Bcf due to extreme heat.
Again, Southwestern is spending considerably for the development of
the fertile Marcellus play, which currently holds 187,000 net
undeveloped acres. The production from the region averaged 9.9 Bcf
in the second quarter that nearly doubled the year-ago rate.
The company is also testing wells in numerous liquids-rich New
Venture plays as it intends to establish a liquid-rich production
growth profile. Southwestern's third well in the Lower Smackover
Brown Dense was completed and had a 24-hour initial production (IP)
rate of 421 barrels per day of oil and 3.9 million cubic feet per
day (MMcf/d) of rich gas. The company indicated that realized oil
prices from this region will likely receive a premium of roughly
$10 per barrel to WTI, given its closeness to four local refineries
with a total capacity of 135 thousand barrel per day.
Southwestern boasts a strong balance sheet with significant
liquidity and financial flexibility. It remains focused on
generating economic returns. It is committed to projects returning
at least 1.3x the present value index (PVI) and intends to only
drill projects that meet that return threshold. Hence, the
company's determined focus on return on investment, in addition to
its large drilling inventory, creates significant value for
Houston, Texas based Southwestern Energy is the purest natural gas
play in the sector. Natural gas accounts for almost all of the
company's reserves and production. Hence, the persistently low gas
price scenario is curbing its spending level, thereby restricting
growth. The company had announced earlier that it intends to spend
less in Fayetteville this year in response to the low natural gas
The current gas price environment has also shattered
Chesapeake Energy Corporation
) financial strength. The second largest natural gas producer in
the U.S. is trying hard to meet its capital needs through its
divestiture program. Chesapeake also exhibits a weak financial
profile with a huge debt balance.
Again, we believe that Southwestern's asset portfolio suffers from
a lack of geographical diversification, with most of its activities
concentrated in the Fayetteville Shale, Arkoma and East Texas
fields. Thus, the company's earnings and cash flow streams are
sensitive to regional pricing or upheavals.
In the light of the points discussed, we believe there is little
room for above-market performance and as such we see the stock
performing in line with the broader market. The company holds a
Zacks #3 Rank (short-term Hold rating).